Have a spare $10,000? This investor says these 3 ASX small caps are worth a closer look

Finally, all the businesses needed to be attractively priced on a five-year view.

The case for Nanosonics (ASX: NAN)

Nanosonics ticks many boxes for us. 

As the only automated ultrasound probe high-level disinfection system approved for the US market, its competitive advantage is obvious. The business model has many appealing characteristics, including a high recurring revenue base, high gross margins, and a solid balance sheet. The business has been reinvesting heavily in new product development, which distorts current-year metrics but will provide the next leg of growth.

The business has been dealing with some cyclical issues. Like most of the world, the US hospital system is under budgetary pressure, impacting short-term growth for Nanosonics. 

In the long term, the business has excellent prospects to grow revenues and increase margins as it matures. Ultimately, this is a quality business that we see as attractively priced for long-term investors. For the three stock portfolios, this will give investors exposure to a global healthcare customer base, linked to ultrasound scan volumes and increasing awareness of the necessity for high-level disinfection.

The case for Nick Scali (ASX: NCK)

Nick Scali is a high-quality domestic furniture retailer with a long track record of gaining market share in the large and fragmented furniture and homeware industry.

It operates a relatively simple but highly effective business model. To mitigate cash flow and inventory risk, they collect a deposit upfront, essentially covering the manufacturing and shipping costs and neutralising the inventory exposure most other retailers are plagued with.

We rate management very highly. As they have outpaced the industry, their buying power continues to improve, as seen in their industry-leading margins. With the inclusion of Plush into the Nick Scali business, there are still many years of rolling out stores to come, underpinning revenue and earnings growth and further market share gains. They have a solid balance sheet, hold little debt, and have an expanding commercial property portfolio held at cost, giving the business more than the necessary resources to fend off any sharp deterioration to the Australian consumer.

Nick Scali is a more mature business; investors can still expect capital growth but with a higher level of franked dividends compared to Nanosonics and Megaport. Again, this exposure is quite different from that of the other portfolio companies, providing investors with customer and revenue activity diversification.

The case for Megaport (ASX: MP1)

Megaport is a quality business that is supported by strong structural tailwinds. Rising network complexity and data consumption drive increased usage from its customers, which are influenced by broader thematics such as the rise of cloud computing and, more recently, AI.

Megaport has taken full advantage of its first mover advantage. The high costs of replicating Megaport's global reach and the increasing offering depth will likely deter new entrants.

Similar to Nanosonics, this business has many appealing characteristics. It has a high recurring revenue model, produces strong gross margins, and is generating operating leverage from its largely fixed cost base. Once established, customers tend to be sticky and grow their usage and sales organically. Management has done a terrific job transitioning the business to a profitable growth model from a growth-orientated strategy.

Megaport has a long runway to grow. As they expand their offering, the revenue opportunity per customer increases materially. We expect to see margins increase as the recurring revenue base grows. Given the structural tailwinds and prospects to grow earnings, we think this business looks attractive for long-term investors. 

This position provides exposure to a global customer base of enterprise customers linked to increasing data consumption and networking spending.